College Graduates… It’s Time to Consider Retirement

Congratulations! You have successfully navigated the long and arduous journey of achieving your educational goals. What is next for you? Well in the immortal words of my wise old grandfather; “Get to work pal!” If you are fortunate to have landed your first genuine, full-time job, you will soon learn about paycheck deductions like taxes, health insurance and retirement savings.

I want to give you a few tips about your employer’s pension plan. Pension plan you ask? You mean nobody in HR has talked to you about your employer’s pension plan that will pay you a nice fat monthly check when you retire in 40 to 50 years? Well the truth is, unless you are a teacher, police officer, firefighter, government employee, or you have traveled back in time to the 1950s, you most likely will not hear your benefits administrator mention the word “pension” out loud.

What is more likely to be included in your new hire packet is information about your new employer’s 401(k) retirement plan. Though 401(k) is most common, you might also be introduced to one of 401(k)’s close cousins, 403(b) or 457. Know that the cousins are a lot alike. These are all defined contribution pension plans. There is no promise of income in retirement with these plans. Rather, the defined contribution pension only promises you an opportunity to save into an investment program. The rest is up to you, and if you’re lucky, your employer will kick in a little something extra for you too.

So how does a 401(k) plan translate to pension income in retirement? The key is to accumulate enough money by the time that you retire so you can draw an income throughout your retirement years. What’s the trick? Well I hate to dredge up bad memories from your recent past, but creating your own pension is a lot like homework. It takes discipline, consistency, hard work, and sacrifice. Nobody can do it for you, and procrastination just makes it a lot tougher. But like homework, the more you put into it, the better result you will achieve.

Here are some tips to get off on the right foot toward building your own pension fund.

1. Start right away! The cost of waiting just 10 years can significantly impact how much you can accumulate by retirement. You have to more than double your contributions to achieve the same result if you start saving for retirement at age 35 instead of age 25.

2. Don’t miss out on employer matching contributions! Many employers offer matching contributions. Contribute at least enough of your own funds to partake fully in the employer matching funds. If you are not offered a plan at work, or your plan does not offer a matching contribution, you may consider an Individual Retirement Account too.

3. Start small if you must, but increase your contributions periodically. Evaluate your contributions to retirement plans annually. Get a raise? Put some of that increase toward retirement. Conventional wisdom is that you will need to save 10% to 15% of your paycheck over your working career to build a comfortable pension for yourself.

4. Don’t stop! Retirement success takes consistency and patience. Interruptions in contributions can wreak havoc on your plan and make achieving your goals much more difficult. Contribute constantly over your working career. It’s a long game that is harder to win after falling behind.

5. Don’t be tempted to dip in! You will be offered enticing opportunities to take funds from your retirement accounts during your career. Loans and early distributions will set you back. You will likely change jobs several times in your career. When you leave a job, consider a tax free rollover of your retirement account to your new employer’s retirement plan or to your own Individual Retirement Account. Taxes and penalties on early distributions can be significant, not to mention the setback in accumulating the savings that you need in order to meet your income goals in retirement.

6. Consider ROTH. While Roth contributions are not tax deductible up front like traditional 401(k) contributions, they can lead to tax free withdrawals during retirement. Your account will likely generate a whole lot of earnings and gains before retirement. Roth account earnings and gains will never be taxed if handled properly. The younger you are, the more Roth might make sense for you.

7. You do not have to be a Wall Street guru to invest well. Most plans have single choices that are diversified and invested appropriately. Look for age based target retirement funds and other managed portfolio options in the plan. Personalized guidance is often available too.

Congratulations on the start of your career. Get off on the right foot with your retirement savings.Your pension is in your hands. It’s never too early to start and I know you can do it!

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